Should I Waive my Appraisal Contingency?
In competitive real estate markets where multiple offers are common and properties are selling for more than their asking price- sellers may sometimes ask buyers to remove their appraisal contingency before opening escrow in a multiple offer counter offer.
This is asking a lot of a buyer, as the appraisal contingency is one of 3 contingencies the buyer gets and removing it before the appraisal is done can expose the buyer to some risk. This tough seller term only shows up in the most competitive multiple offers situations, with at least 5 offers or more.
Why do sellers want to remove the appraisal contingency?
The fewer contingencies (or no contingencies) and the shorter the contingency length the better the sale terms are for sellers so if they can improve the terms of the sale by eliminating or shortening contingencies they have an interest in doing that. For the appraisal contingency, if the price of a property gets bid up higher than the market value of the property, the seller would like to know that they will get the price they are offered even if the property is unlikely to appraise.
This term can be a real gut check for buyers because it asks them the question- if the property doesn’t appraise for their offer price – are you willing to pay the difference in order to buy the property?
As part of your offer homework, you should have already reviewed the comps before writing an offer so you should have a good idea of the range that an appraisal will come in at.
In hot markets, values can rise faster than appraisals can keep up with. Appraisers look at comparable sales from the past six months so they are looking backward into the past. In their appraisal reports, they will note the market direction, whether the market is increasing, in balance, or declining. However they have to find at least 3 or 4 comps to support value and if the market is racing to new highs, there may not be able to find any comps to justify a high price that won multiple offers.
What are the risks for buyers of waiving my Appraisal Contingency?
The only time waiving your appraisal contingency becomes a problem is if the property appraisers for less than your offer price. If the property appraises low in a normal escrow with an appraisal contingency, you could either cancel the escrow or request the seller to lower the price. Most buyers I know don’t want to pay more than what their bank says the property is worth. What happens a lot is the buyer and seller renegotiate the price similar to a request for repairs.
With no appraisal contingency, there is no price renegotiation for that reason. Confronted with a low appraisal, buyers can make a request to the appraiser for a reconsideration of value and attempt to get the appraisal value up. Sometimes real estate agents will try to do this to save a deal that might otherwise be lost. I have had some success in the past in getting appraisals up but not significant amounts. Most appraisers do hundreds of appraisals each year so they have got their job down to a science. They are still human and do make mistakes. I have found it best to approach them in their own terms and try to find ways to support a higher value while following their appraisal guidelines. If you can get the appraisal up higher that will bridge the gap.
If the appraisal is short, that is all the bank is willing to lend. Any difference beyond that has to be made up by adding cash to closing costs.
Let me show a quick made-up example: let’s suppose property was listed for $500,000 got 4 offers and was bid up to $550,000. The winning bidder is a 20% down buyer. The appraisal comes back at $515,000. In this scenario, the buyer would be putting down $110,000, however since the property didn’t appraise that will change the downpayment amount. 20% of $515,000 is $103,000 plus $35,000 shortfall means the downpayment just went up to $138,000 to keep 20% down loan terms. If the buyer didn’t have the extra cash they could opt for a different loan, maybe 10% down or 15% down instead.